In Accepting Mobile Payment, Merchants Face Higher Fraud Risk

On average those merchants faced 3,385 attempts to commit fraudulent transactions each month, suggesting the need for tighter security as more merchants accept mobile payments, according to Javelin Strategy and Research, which conducted the survey in June for LexisNexis Risk Solutions.

As mobile payments gain momentum, they will also open up to "greater fraudulent exposure that may not exist across other methods," said Jim Rice, director of market planning, retail and e-commerce at LexisNexis Risk Solutions, a division of LexisNexis.

Alan Ruperto, a Javelin associate analyst, said that of the fraudulent transactions mobile merchants face, 38% go through undetected, because even with "various fraud-mitigation tools in place, fraudsters can still steal a consumer's card account."

Overall, fraud losses as a percentage of total revenue were 1.13% for mobile merchants, compared with 0.83% for online-only merchants and 0.86% for merchants with both online and brick-and-mortar stores. The report did not state the total monetary losses for each merchant type.

Online-only merchants faced on average 2,033 attempts to commit fraudulent transactions each month, while merchants with both online and physical stores faced 2,142 attempts, according to the report.

So far this year, large e-commerce merchants have faced an average of 3,161 attempts per month, with 34% going undetected.

Despite the higher fraud risk, many merchants remain interested in accepting mobile payments. A quarter of merchants in the Javelin survey said that they planned to start accepting mobile payments within the next 12 months, Rice said.

Across the entire retail industry, merchants lost about $139 billion in all fraud areas in 2009, Javelin's research found. For every $100 in fraudulent transactions, merchants incurred a cost of $310 in total losses when including costs associated with replacing lost or stolen merchandise, the report said.

The majority of consumer card fraud occurs on existing credit and debit card accounts, the research found. In 2009, credit card fraud affected 6.5 million victims and debit card fraud 3.5 million, representing 65% and 28% of all existing card fraud respectively, according to the report.

In the credit and debit card markets, however, fraud losses fell. In 2009 a fraud victim on average paid $314 out of pocket for credit card fraud, down from $521 in 2008, while the amount for debit card fraud decreased to $243 from $545. The out-of-pocket costs include anything related to the resolution of fraud, such as lost wages and attorney fees.

LexisNexis, of Atlanta, attributes the decline in costs to better account monitoring and shorter periods of both misuse and detection.

To combat fraud, the merchants said they increasingly are outsourcing transaction and customer-profile databases to third-party risk management providers.

Merchants are also increasingly using point of sale authentication devices; Internet protocol address detection; rules-based filters to block high-risk transactions; tracking tools and online-purchase authentication systems such as Verified by Visa Inc. or MasterCard Inc.'s SecureCode; and asking consumers to use the card verification value or card validation code written on the back of each card.

More than half (54%) of the merchants participating in the Javelin survey said that education is an essential component to reducing fraud losses.

Merchants should "show consumers how to protect themselves against fraud so they always feel comfortable making a purchase," either in-store, online or via a mobile phone, Rice said.

Consumers, Ruperto said, want to feel secure and be "in control of that security."

"Based on Javelin's recent research," he said, "several financial institutions and issuers now offer consumers tools to monitor their accounts through e-mail or text-message alerts." And with mobile banking, consumers may check their accounts at any time to detect any fraudulent transactions, Ruperto noted.

With increased consumer and merchant education and an improved economy, fraud losses in 2010 should decrease, the report said.

But Rice said that "merchants should remain proactive" about fraud prevention, especially if they plan to accept mobile payments.

Javelin, of Pleasanton, Calif., surveyed roughly 1,000 merchants online and interviewed more than 5,000 U.S. adults by phone, including 828 fraud victims.